Subsidy and the alleged missing billions

By Chinwoke Akoma
The Senate Finance Committee sitting on alleged missing N20billion dollars had a lot of interesting testimonies. From the initial accusations by the suspended CBN Governor, Mallam Lamido Sanusi, to the clarifications by the various government agencies,facts are out in public domain which have enlightened the public on the issue.

For example ,Nigerians now know that the allegation that kerosene subsidy is illegal is no longer sustainable . This is because the so-called presidential directive stopping subsidy was discovered to be contradictory and unimplementable by the then Petroleum Minister Rilwanu Lukman . It also came to the fore that there is truly subsidy on kerosene but the impact is not being felt because of the high demand in the face of low supply. Nigerians also now know that by virtue of the Petroleum Act ,the oil corporation has the power to incur expenditure.

Many more facts came out including the fact that nobody is ready to withdraw subsidy on kerosene as even the Senate Committee asked the executive arm to make request through supplementary appropriation. Even at that, the hearing was confronted with the reality of a provision of the Petroleum Act which empowers the Minister of Petroleum Resources to fix the prices of petroleum products. The plan for an independent audit was also unimplementable because the responsibility is statutorily that of the Auditor General of the Federation.

The Senate sitting had opened with a theatrical drama by the suspended CBN Governor. He anchored the missing N20billion on the argument that there is no subsidy. But events have proved that there is indeed subsidy ,leading to the new reality that the so-called missing money was spent on kerosene subsidy. If Sanusi had succeeded in proving that a presidential directive stopped subsidy,he would have also triumphed in claiming that the N20billion dollars was illegally spent . On both counts,Sanusi failed as several documentary evidence confirmed.

First, Lukman, in his capacity as Petroleum Minister, was obviously unable to implement this directive as the inherent contradiction in the directive was at variance with a fundamental and critical requirement of the Petroleum Act which requires the issuance of a gazette. Specifically ,the directive contained a clause that said the subsidy removal should not be made public.

For the avoidance of doubt , the letter of the controversial presidential directive is to the effect that commencing from July 2009: “Eliminate existing subsidy on the consumption of kerosene, taking into account that subsidy payments by government, on kerosene do not reach the intended beneficiaries. Public announcement of this measure should be avoided”.Lukman refused to gazette the directive because of the contradiction . So subsidy continues especially after the violent demonstrations of 2012.

The other thing is why the high prices of kerosene despite subsidy? The President of the Independent Petroleum Marketers Association of Nigeria, IPMAN, Alhaji Aminu Abdulkadir, said the problem has to do with high demand versus low supply as the quantity subsidised is not sufficient to meet the needs of kerosene users. Said he: “About 7 to 10 million liters are supplied but our national consumption today is about 15 million liters. There is a shortfall in supply, hence people think the subsidy is not reaching the people. There is subsidy”.

The management of the Nigerian National Petroleum Corporation (NNPC) also said that diversion of kerosene to neighbouring countries, industrial use, aviation fuel, sharp practices by middlemen and pipeline vandalism are reasons kerosene is not readily available for domestic consumption. Group Managing Director of the corporation, Engr. Andrew Yakubu, made this disclosure during the two-day investigative public hearing on supply, distribution, expenditure and subsidy on kerosene.

Yakubu maintained that due to a number of issues ranging from incessant pipeline vandalism and diversion of the product to road construction, the product, meant for the masses, is not readily available. “There are quite a number of competing demands for kerosene and until these are addressed by other relevant agencies, the issue of kerosene not being readily available for domestic use will continue to reoccur every now and then.

The way out is for this committee to collaborate with the NNPC to encourage the sale of liquefied petroleum gas otherwise known as cooking gas,” the NNPC boss said.

Responding to a question on whether kerosene subsidy is still in place, he said that was exactly what he met when he assumed office in June 2012, adding that kerosene subsidy is funded by unrealizable revenue flow. “The NNPC takes crude at international price and sells it at the domestic market at regulated price of N50 per liter,” he stated. Answering a question on what the NNPC is doing to stop kerosene diversion, the NNPC helmsman said that the Corporation does not have the power to police marketers and sanction them, adding that there are statutory bodies with the responsibility.

Commenting on the legality of kerosene subsidy, the NNPC Company Secretary, Anthony Madichie, citing Petroleum Act section 6 subsection 1, said only the Minister of Petroleum Resources has the authority to fix petroleum product prices, stressing that if a presidential directive is given and not gazetted, such directive will not be effective.

In his submission to the committee, the Managing Director of the Pipelines and Products Marketing Company, PPMC, a subsidiary of the NNPC, Prince Haruna Momoh, informed that kerosene is sourced for the Nigerian market through importation and domestic refining, adding that dual purpose kerosene (DPK) is sold to coastal marketers, Major Marketers Association of Nigeria, MOMAN, Depot and Petroleum Products Marketers Association, DAPPMA and NNPC Retail.

“I can confirm to this committee the statistics for the supply of DPK is as follows. In 2010, NNPC supplied 2,515,582.44 metric tonnes of DPK, in 2011, NNPC 1,922,263.56 metric tonnes, in 2012, NNPC supplied 2,622,843.20 metric tonnes and in 2013, NNPC supplied 2,671,747.97 metric tonnes making a total of 9,732,437.17 metric tonnes,” Momoh revealed.

Marketers also supplied further statistics on the existence of subsidy.The price regime of DPK ex-refineries/depots in Nigeria is at N40.90k/litre, NNPC sells DPK at its retail outlets for N50/litre. If the PPPRA template is taken into account, DPK is expected to have a landing cost of N130/litre leaving a gap of about N80/litre which is a cost element to NNPC and the tune to which DPK is subsidized for the populace.

Demand versus supply

The question ‘where does the subsidy go?’ then arises. The total demand for DPK across all sectors by far outweighs the supply available nationwide thus leading to a shortage of the product and a resultant increase in the equilibrium price. This is the major reason the subsidy though enormous is not being felt by the populace.

Another major development is a submission which went a long way to settle many contentious issues affecting a subsidiary of the oil corporation.

The Attorney General of the Federation and Minister of Justice, Mohammed Bello Adoke, said the NNPC can legitimately transfer its participating interest in oil mining leases (OML) to its wholly owned subsidiary, the Nigerian Petroleum Development Company,NPDC.

The AGF provided the legal position during the investigative hearing of the Senate Committee on Finance on the alleged unremitted $49.8bn oil revenue in respect of the status of $6bn NPDC gross revenue which Sanusi had alleged should have been remitted to the Federation Account by the NNPC.

Adoke informed that by virtue of paragraph 14 to 16 of the First Schedule of the Petroleum Act, CAP.P.10 Laws of the Federation of Nigeria, LFN, 2004 (NNPC Act) and Regulation 4 of the Petroleum (Drilling and Productions) Regulations 1969 as amended, a holder of an OML or Oil Prospecting License (OPL) can assign its interest provided the consent of the minister of petroleum resources is obtained.

On whether all revenues derived by the NNPC from upstream operations including those under which OMLs in the JV operations are payable to the Federation Account, the minister posited that NNPC is generally under an obligation to remit its revenue from the upstream petroleum operations into the Federation Account.

According to him, this is, however, dependent on the definition of ‘revenue’ within the meaning and intendment of section 162 (10) (c) of the constitution of the Constitution of the Federal Republic of Nigeria 1999 (Constitution) saying that the NNPC can by virtue of section 7(4) of the NNPC Act defray all expenses incurred in the course of its business in the upstream operations.

The AGF stated that the NNPC is required to pay into the Federation Account the ‘net revenue’ as opposed to the ‘gross revenue’.

Meanwhile, IPMAN has warned that kerosene subsidy removal was capable of bringing down government even as it denied reports that it bribed officials of the petroleum ministry and the oil corporation on allocations.

Speaking in Abuja ,the National President of IPMAN, Alhaji Aminu Abdulkadir, said the bribery allegation was part of the plot to politicise the oil sector ,stressing that “any removal of subsidy is a ploy to instigate uprising against government as kerosene subsdised the cost of living for the poor.

The IPMAN leader said those plotting to derail the Jonathan presidency are the ones behind the push to withdraw kerosene subsidy which he said would impose further hardship on the poor,canvassing that “subsidy should remain until LPG supply is sufficient to fill the gap.

”Until LPG is widely available,you cannot remove subsidy. If you do,it will bring social unrest. I strongly advise that subsidy should remain. I also call on the minister to call industry operators to order to put in more efforts into the provision of LPG. Part of the subsidy should be used to fund facilities for LPG”,he said .